How to find your ‘freedom numbers’

KnowHow founder Bushy Martin reveals the four simple ‘freedom numbers’ you need to unlock when looking to build wealth through property.

On Property Hub’s Get Invested podcast, Bushy talked about the importance of working out your lifestyle income, nest egg number, break-free timeline and overall freedom numbers.

Understanding freedom numbers will help investors to determine and work towards their three Purpose P’s – Personal needs, Professional goals and Passive income.

What is my lifestyle income?

In order for investors to monetise their perfect life, they simply need to calculate how much their ideal lifestyle will cost per year.

“This gives you the answer to the question of how much is enough? And it avoids the endless chasing of money for moneys sake that plagues many high achievers and often ends up killing them prematurely. Once you’ve invested enough to create the passive income required to fund your ideal lifestyle, whatever that looks like, then the job’s done, the game’s over and the mission’s accomplished,” Bushy said.

“As a rough guide and starting point, I’ve done a lot of research on this subject and a couple currently needs about $120k a year combined to enjoy a reasonably comfortable lifestyle. This includes ample holidays, travel, recreation, limited leisure activities, eating out and entertaining, good clothes, a nice car and probably health insurance. Assuming the timing, of course, that at that stage, your home loan’s completely paid off. Another easy way to kick things off and work out your lifestyle income is just to use about 80% of your current combined household income. Again, that’s if your home loan’s paid off and if your current lifestyle’s comfortable and enjoyable.

“Now, I need to stress here that I’m not a financial planner or an accountant. So what I’m talking about here is what’s worked well for me personally, and it’s not intended as financial advice in any way, shape or form. So you will need to verify what suits your specific situation with your accountant and or a financial planner.”

What is my nest egg number?

Once investors determine their lifestyle income, they can calculate their nest egg number. This is the total size and value of the income-producing assets needed to fund the lifestyle income long-term.

“For example, let’s start with a long-term lifestyle income of $200k per year. It’s then very easy to calculate your nest egg number, which is a combination of your super, shares, property, index funds, managed funds, you name it, that are all growth assets to produce an income,” Bushy said.

“All we need to do then is multiply your lifestyle income number by 20, based on a pretty conservative 5% net return on your income-producing assets. So in this case, $200,000 multiplied by 20 equals four million, and we use 20 because that’s effectively 5%. So $4M in income-producing assets is needed, which excludes your family home, as this is not technically an asset as it puts no income in your pocket and it actually costs you money to maintain. So your nest egg number is therefore $4M.

“Now, while this initially sounds a little bit scary and daunting when most people’s super balances are in the low hundreds of thousands, if you’ve got enough time on your hands, you’re going to be very surprised at how easy this is to achieve.”

What is my break-free timeline?

The third step is identifying a break-free timeline, which is the number of years investors have before they want to be in a position where they don’t have to work anymore.

“And the emphasis here is on ‘have’ to work, because you may keep working or building your business or career if you want to, but you don’t have to. And this subtle shift will have a massive impact on your mindset and your ongoing enjoyment of life. For me, I don’t believe in retirement because it actually ends up killing most people prematurely. And I think a lot of this has got to do with a lack of ongoing purpose. So we prefer to call it a requirement where you’re financially able to transition into doing things that you want to, not that you ‘have’ to,” Bushy said.

“If you’re just starting out on your passive investment journey, you need to be considering an absolute minimum break-free timeline of 15 years. Why? Well, my research on sustainable long-term success in any endeavour keeps demonstrating that you need a minimum of 15 years to make it happen. So for the sake of this exercise, let’s use 20 years as the break-free timeline.”

What is my freedom number?

Using these three figures, investors can then find their overall freedom numbers.

“Now we have a lifestyle income of $200,000 a year, a nest egg number of $4M based on the 20 rule, and a break-free timeline of 20 years. So, starting from scratch, this means that your freedom number today, using the freedom forecasts we developed, is around $1.4M, which equates to about three quality growth investment properties. So, you just need to secure $1.4M worth of high-growth income-producing assets in the short term to give you an ongoing passive lifestyle income for life of around the $200,000 a year mark, from an income-producing nest egg of about $4M, over your break-free timeline in 20 years time,” Bushy explained.

“So while it looks like pretty scary numbers to start with, investing in between two to four good quality growth investment properties will do most of the heavy lifting to ensure that you attain and sustain your ideal lifestyle long term, as long as your break-free timeline is 15 years or more. Fifteen years is also the average amount of time that an area takes to go through a complete S-curve growth cycle, based on what’s actually happened in Australia over the last 45 years. And this is important because many property investment spruikers still talk about doubling your wealth in ten years, so you might get lucky, but I suggest that you plan for the worst and then expect the best and you’re not going to be disappointed.”

Listen to the full episode here.

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